Defendants Ask Dismissal Of KPMG Case

Say U.S. Misconduct 'Shocks the Conscience'

By Beth Bar
New York Law Journal
June 12, 2007


Claiming that the government has been "of no assistance in remedying the harm" it caused to its clients, attorneys for 16 former partners at accounting firm KPMG have asked Southern District Judge Lewis A. Kaplan to dismiss criminal tax fraud charges filed against them.

In legal papers filed late Friday in United States v. Stein, 05 Cr. 888, the defendants claim that "because the government's pattern of misconduct in this case 'shocks the conscience' Rochin v. California, 342 U.S. 165, 172 (1952), and because no other remedy would adequately restore the status quo prior to the constitutional violations, the indictment should be dismissed with prejudice."

The motion to seek a dismissal of the indictment follows a May 23 ruling by the U.S. Court of Appeals for the Second Circuit in Stein v. KPMG, 06-4358-cv, rebuffing Judge Kaplan's attempt to take ancillary jurisdiction over a civil suit filed by the ex-employees to force KPMG to pay their legal fees in the criminal action (NYLJ, June 1, May 24).

Last year, Judge Kaplan concluded that the Southern District U.S. Attorney's office had violated the defendants' Fifth and Sixth Amendment rights by using the threat of prosecution to pressure KPMG into cutting off legal payments (NYLJ, June 28, 2006).

"KPMG refused to pay because the government held the proverbial gun to its head," the judge said in his June 26, 2006 decision. "Had that pressure not been brought to bear, KPMG would have paid these defendants' legal expenses."

The government has denied any wrongdoing. It has until June 22 to answer the defense motion in the tax fraud case. Judge Kaplan has scheduled a hearing for July 2.

In their motion to dismiss, defense attorneys outlined the government's alleged pre- and post-indictment misconduct. They claim prosecutors' comments at an initial Feb. 25, 2004 meeting between an investigative team from the U.S. attorney's office and KPMG's lawyers - including the statement that it would view the discretionary payments of fees "under a microscope" - had the "intended effect."

"Worried KPMG lawyers informed KPMG officials that it did not appear that they could both pay fees for individuals per the prior practice and save the firm," attorneys for the former KPMG partners said. "KPMG quickly caved to government pressure to try and save the firm at the expense of its current and former partners and employees."

Following the February 2004 meeting, defense attorneys said the prosecution took "full advantage of KPMG's decision to prostrate itself" before the government. When KPMG advised its employees to seek representation by counsel when cooperating with the government, the prosecutors objected, rewriting KPMG's communication to its own employees to state that it was entirely the choice of KPMG employees to meet with investigators "without the assistance of counsel," the defense claims.

According to the defense lawyers, the government notified KPMG's attorneys when its employees failed to cooperate as the government saw fit, "ineluctably" leading to coerced proffers and termination of employees.

In March 2005, attorneys said KPMG began hashing out a statement of facts with the government that the company hoped would be used in connection with a non-prosecution agreement. The defense court papers say that prosecutors advised KPMG on the wording they wanted it to include in this document ("willfully; fraudulent; obstruction") and again threatened to indict the company.

The defendants' attorneys said the government's misconduct continued after the employees were indicted. It said the government's strategy has been to oppose severance of the one case into multiple cases in order to induce guilty pleas, using fees as leverage.

"[A] September 22, 2006 [letter to the court] makes the choice clear: fees or pleas, and the government's misconduct in cutting off the former (and its subsequent machinations on severance and discovery) were intended to produce the latter," the attorneys argued.

'Minimal Defense'

Attorneys for the former partners said their clients have been "inundated" with more than 22 million pages of documents, thousands of government trial exhibits totalling more than 100,000 pages, and approximately 70 potential government witnesses "all without the resources that would have been available but for the constitutional violations."

Judge Kaplan had previously estimated the costs of mounting a "minimal defense" at $500,000 to $1 million per defendant, but the attorneys claim it was no longer possible to fashion a reasonable estimate of a "minimal defense," except to state that it will run into the "multiple millions of dollars."

"For nearly two years since the indictment . . . Defendants have labored without resources that would otherwise have been available from KPMG but for the government misconduct," the attorneys said. "Ancillary jurisdiction is no longer an option and . . . alternatives short of dismissal are simply not viable."

Judge Kaplan does have the option of granting the former KPMG employees an adjournment in order to pursue claims directly against KPMG, but attorneys for the ex-KPMG partners said it would be difficult to establish the forum in which to proceed.

KPMG has argued that most of the fee claims are subject to arbitration.

"Should the claims be subject to arbitration, there certainly will be prolonged proceedings, perhaps in multiple [forums], resulting in an unavoidable forfeiture of Defendant's Speedy Trial rights and expenditure of additional resources that could otherwise be devoted to their criminal defense," they said.

Moreover, the attorneys said that if KPMG were to prevail in arbitration, their clients would again be back where they started, except for suffering "further injury through expenditure and delay."

David Spears of Spears & Imes and Craig D. Margolis of Vinson & Elkins represent defendant Jeffrey Stein. Messrs. Spears and Margolis submitted the motion to dismiss on behalf of all of the defendants. Mr. Spears was out of the country and unable to comment, and Mr. Margolis did not return calls for comment.

A spokeswoman for the U.S. Attorney for the Southern District declined to comment.

Charles A. Stillman, a partner at Stillman, Friedman & Shechtman and one of the attorneys representing KPMG, said KPMG had no comment.